Pros and cons of financing your single-family rental investment

Pros and cons of financing your single-family rental investment

Single-family rental investments allow investors to diversify their portfolios and mitigate risk, but the upfront cost can be substantial. As real estate is the only investment asset that allows financing through loans, many investors procure loans to purchase their SFR investments. Borrowing can actually enhance the returns on rental properties. HomeUnion® makes SFR investment simple by providing an end-to-end solution for finding, vetting, acquiring, financing  and managing single family investment properties.

People interested in investing in real estate should consider the following points to decide if financing will help them achieve their financial goals:

Low interest rates boost ROI

The average interest rate for investor loans is generally higher than the rate charged on owner-occupied home loans, and the rate for investors still fluctuates with the national interest rate. While 30-year fixed-mortgage interest rates for owner-occupied homes have hovered around 4 percent for the past year, the average investor can expect rates closer to 5 percent.

As is the case with any loan, several factors determine the exact rate an investor receives,including the borrower’s credit history. Even with higher interest rates, however, investors are able to leverage a home loan to make more money over the time they own a house. When an investor locks in the interest rate on a home loan, they ensure that their payments will remain consistent. Because rental rates tend to increase over time, a home investor will make more money while their costs remain fixed.

This is an appealing option for individuals who want to maximize their earnings over the long term, but it may not be the best choice for those who want to make money quickly. Investor loans are useful for people who want to invest for retirement savings and for those who intend to keep properties for a long period of time. Individuals who want immediate cash flow income would be better served buying a home outright.

A loan increases some risks…

People looking for a quick investment should avoid loans, which make short-term investments risker. Although real estate prices and rents generally increase over time, they fluctuate month to month or year to year. This means that a person who gets a loan with the intent of selling a house soon after risks a potential loss of equity.

Those investors should purchase homes in all-cash transactions. Doing so insulates them from rental rate shifts and property value depreciation. If property values decrease by 3 percent, that represents a small piece of the owner’s equity if he or she owns the house outright. For an investor who financed his or her purchase, a 3 percent decline in the home’s overall value represents a larger chunk of equity.

This is less a danger than a consideration for potential investors. Like stocks, real estate represents a long-term commitment, and an investor makes the most money when he or she holds on to a property for several years.

…and can eliminate others

Financing SFR purchases allows investors to do more with their money. If investors purchase a home in an all-cash transaction, they are consolidating risk on that single property’s performance. With loans, an investor can spend the same amount of money and spread his or her investment over several properties in different real estate markets. This both mitigates risk and provides an opportunity for even bigger return on investment.

For instance, investors who owned single-family properties in Atlanta during the first quarter of 2015 experienced the highest rental return rate in the country, according to RealtyTrac. That same investor could have used financing to increase his or her holdings in Atlanta, or he or she could expand into other high-growth markets such as Florida or Texas.

HomeUnion® provides an easy way for investors to discover and purchase prevetted single-family rental properties. Register to view available properties and get guidance on financing options.

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